Brief Exercise 16-4 Marigold Corporation issued 1,800 $1,000 bonds at 102. Each bond was issued with...

Brief Exercise 16-4

Marigold Corporation issued 1,800 $1,000 bonds at 102. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 99, and the warrants had a market price of $33.

Use the proportional method to record the issuance of the bonds and warrants

Solutions

Expert Solution

Issue price = 1,800 x $1,000 x 1.02 = $1,836,000

Market value of bonds after issuance = 1,800 x $1,000 x .99 = $1,782,000

Market price of warrants after issuance = 1,800 x $33 = $59,400

Therefore,

Total fair market value of the bonds and warrants after issuance = $1,782,000 + $59,400 = $1,841,400

Allocate the issue price of $1,836,000 to bonds and warrants on the basis of their fair market values.

Issue price allocated to bonds = $1,836,000 x $1,782,000/$1,841,400 = $1,776,774

Issue price allocated to warrants = $1,836,000 x $59,400/$1,841,400 = $59,226

Record the issuance through the following journal entry:

Account Titles and Explanation	Debit	Credit
Cash	1,836,000
Discount on Bonds Payable ($1,800,000 - $1,776,774)	23,226
Bonds Payable		1,800,000
Paid-in Capital - Stock warrant		59,226

ekkarill92 answered 9 months ago

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